WSJ: Fed Officials Increasingly Likely To Intervene

Tuesday, 24 Jul 2012 05:11 PM

By Forrest Jones

Federal Reserve officials are growing increasingly in favor of stimulating the stalling U.S. economy, the Wall Street Journal reports.

Methods could include purchasing bonds held by banks, a stimulus tool known as quantitative easing that floods the economy with liquidity to spur recovery, or extending the outlook as to how long Fed officials foresee interest rates staying near rock-bottom levels.

Other methods may involve lowering the interest rate at the discount window, where banks go to borrow money directly from the Fed.

Since their June meeting, when Fed officials took a wait-and-see approach to intervening, the economy has shown further signs of deterioration.
Fears are growing the economy may hit stall speed, where like a plane, it's generating too little momentum to achieve escape velocity and break free from the pull of a fresh slowdown.

"New worries are emerging at the Fed that the economy is falling short of that speed. The Commerce Department is expected to report this week that the economy grew at a rate substantially below 2 percent in the second quarter after expanding just 1.9 percent in the first quarter," the Journal reported.

"The unemployment rate, at 8.2 percent in June, has moved little since January. Retail sales have been soft in recent months and financial markets, particularly in Europe, have become strained in past weeks."

The Fed will hold its next monetary policy meeting from July 31 to Aug. 1.

Some senior Fed officials have said they're ready to act if the economy continues to show more signs of cooling, including Federal Reserve Bank of Cleveland President Sandra Pianalto said Tuesday.

"If recent weak economic data persist and cause my outlook for economic growth and inflation to become weaker than I currently anticipate, additional policy actions could be warranted," Pianalto said, according to a copy of a recent speech she delivered to the Economic Research Institute of Erie posted on the bank's site.

“My outlook is subject to considerable uncertainty, since any number of better or worse scenarios could actually materialize,” Pianalto added.

“There is no substitute for constantly assessing incoming information, updating forecasts, and evaluating the costs and benefits of our policy options.”

Pianalto holds a vote on the Federal Open Market Committee (FOMC), the Fed's interest-rate body.
Talk of quantitative easing usually sparks some kind of reaction on Wall Street. The policy, dubbed by many as printing money out of thin air, pumps up stock and commodity prices and weakens the dollar.

Critics say quantitative easing is merely printing money out of thin air and plants the seeds for inflation down the road while supporters say the tool is necessary to steer the country away from collapse.